Bain Capital Finds Structured Financing Opportunities in China, Japan Real Estate

Funding gaps in China and Japan are yielding opportunities to provide structured financing solutions to real estate owners and operators across the capital stack, according to senior executives from Bain Capital who spoke at Mingtiandi’s Singapore Forum on Tuesday. Watch the full recording>>

With some mainland businesses facing a challenging funding environment amid stringent bank lending requirements and expensive private equity financing, investors can generate favourable returns by providing tailored capital solutions, according to Michael Hui, partner and head of China special situations and real estate at Bain Capital.

“Oftentimes the businesses or assets that we look at are perfectly performing businesses…they are just at a point of inflection in their growth journey, or they need capital which banks are too inflexible to address and private equity might be too expensive for them,” said Hui. “So we often find real estate owners or operators in Asia in these capital gap situations which we can help address. We invest in assets, we invest in operators, and sometimes we pair these two solutions together, oftentimes investing across the capital stack in providing bespoke solutions.”

Hui was joined in the spotlight interview at the Yardi-sponsored forum by Man Kinoshita, a partner at Bain Capital’s Japan special situations team.

Refinancing Opportunities in China

In China, where traditional onshore financing has been unable to offset the retreat of low-cost offshore financing, Bain Capital sees opportunities to refinance the debt of non-distressed businesses seeking capital for growth.

“Refinancing is one of the big themes because historically, a lot of these China assets were financed with offshore leverage, and obviously that was during the age when offshore leverage had very low interest, and now that capital structure just doesn’t work anymore,” said Hui. “You can’t just borrow onshore to refinance these offshore loans directly. So there will be a lot of these refinancing situations where you need to re-do the cap structure and where we can come in and provide a solution they need.”

Hui pointed to the importance of structuring deals with a clear exit path, with the advancement of China’s REIT programme, as well as growing real estate allocations by mainland insurers, emerging as channels of potential liquidity for investors. Bain Capital’s Asia special situations strategy has realised $1.5 billion of liquidity so far this year, with over a quarter of that coming from China, according to Hui.

With the Chinese government promoting industrial REITs and insurers seeking less cyclical real estate assets, Bain Capital has continued to bet on manufacturing parks amid China’s continued export growth, with Hui pointing to sticky leases and lack of new supply boosting yields of manufacturing facilities. Last October, the private equity giant set up a $250 million joint venture with DNE Group to build and operate manufacturing parks across China in its second partnership with the local industrial developer.

“We always talk about Chinese insurers’ real estate allocation being still relatively low – it’s not that they don’t want to allocate more, it’s that historically, a lot of the assets that they picked up, like offices, are relatively cyclical,” said Hui. “So you need to create assets that are less cyclical, that are more resilient for them to pick up. Same thing for the REIT market as well. Right now, the five-year government bond rate is below 2 percent. So the kind of spread that we are creating by developing these manufacturing parks is extremely high.”

Japanese Value-Add

With interest rates expected to remain relatively low in Japan, Bain Capital sees a broad range of opportunities to provide capital across the risk spectrum for Japanese corporates, including pure asset acquisitions, private equity buyouts and alternative debt financing.

“If (corporates) want to be taken private, we can provide a take private transaction,” said Kinoshita. “If they want to just purely sell their real estate asset, which is totally under-managed, we can buy the asset itself. Or, if they need a kind of credit enhancement, we can provide risk-rescue financing capital for them to sustain their business going forward…that’s what we are targeting right now.”

Bain Capital is eyeing value-add opportunities across a range of property sectors to tap growing interest among Japanese corporates for unlocking value from real estate assets on their balance sheets.

“For corporates, they always have a lot of office assets, and manufacturing is going to be combined into data centres or logistics,” said Kinoshita. “They also have a lot of residential or retail assets on their balance sheet. So whatever the asset class, we are flexible to deploy capital, as long as we can make some kind of a value-add opportunity from those assets held by Japanese corporates.”

Kinoshita also pointed to abundant bank lending as helping to finance real estate deals in the country. The executive disclosed that Bain Capital had invested in a luxury hotel last week, with the acquisition having been financed with a “very attractive” loan from a Japanese mega-bank.

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